October 19, 2018  
 
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Small Business Retirement Planning

 

SIMPLE IRA Contribution Limits

Setting up a SIMPLE IRA can be a smart move for small business employers. But the rules for SIMPLE IRAs are different than they are for other employee retirement plans, especially when it comes to contribution limits.

Small business employers often have close relationships with their employees.

In a small business workplace, employees seem more like family than hired guns, causing business owners to take a personal interest in their employees' prosperity and financial security.

The only problem is that the company's bank account is usually too small to keep up with the owners' desire to provide for the long-term security of his workforce. Although retirement plans are an attractive benefit option, they're also pricey and simply not an option for small business employers.

SIMPLE IRAs offer an affordable alternative to high-end retirement plans. There types of IRAs are fairly straightforward and easy to administrate you can either choose a designated financial institution to manage all of your workers' IRAs or offload the responsibility for finding an eligible financial institution to each individual employee.

In a SIMPLE IRA, the employer is required to invest in the employee's IRA in one of two ways, either through a matching contribution of up to 3% of compensation, or through a 2% nonelective contribution (a 2% employer contribution that is made regardless of whether or not employees choose to contribute to the plan). Sounds easy, right? Generally speaking, it is. But small business employers and employees also need to understand the restrictions and limitations involved with SIMPLE IRAs. Specific IRS guidelines exist about SIMPLE IRA contribution limits and these amounts vary from one year to the next.

SIMPLE IRA Contribution Limits

The only types of approved SIMPLE IRA contributions are salary reduction contributions (employees) and employer contributions (either matching or nonelective). For example, a worker is prohibited from making a contribution outside of a salary reduction.

For tax years 2010 and 2011, the amount of contributions an employee can make to a SIMPLE IRA plan through salary reductions is limited to $11,500. If the employee participates in other employer retirement plans during the tax year, the total amount of contributions for all plans cannot exceed $16,500. If allowed by the plan, employees who are age 50 and older can make "catch up" contributions in the amount of $2,500 or less for each year.

Employers who choose to make a matching contribution must make a dollar for dollar match for up to 3% of the employee's compensation. Employers can decide to match less than 3%, but it has to be at least 1% and the reduction cannot exist for more than two out of five years. Employers can opt-out of the matching contribution by making a nonelective, 2% contribution based on compensation up to $245,000.

Related Articles

Want to learn more about this topic? If so, you will enjoy these articles:

Understanding SIMPLE IRAs
Understanding SEP IRAs
How to Set Up a Small Business SEP IRA Plan
SEP IRA Contribution Limits


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